EUR and JPY funding currencies at war - Rabobank

Analysts at Rabobank noted that On 5 June 2014, the ECB became the first major central bank taking its deposit benchmark rate into negative territory.
Key Quotes:

"At the time, a negative deposit rate was seen as cutting two ways: 1) to overcome the zero bound in interest rates and improve the transmission of the ECB rates policy to both market and commercial bank rates, and 2) to incentivize financial institutions to lend more to the ‘real economy’. However, over time, the rationale has shifted toward a policy that aims to weaken the currency and prop up inflation expectations. The (surprise) deposit rate cut in September 2014 and the cut in December 2015 clearly fall into that category.

"We believe that – from a strategic market perspective – it is the currency war among major central banks that is the biggest stumbling block to the success of negative rates. Lowering the risk-free rate obviously serves as a powerful and very direct tool to weaken the currency. However, such an open attack on other central banks strongly raises the risk of retaliation. This became painfully clear at the end of January, when the Bank of Japan (BoJ) announced its new staggered deposit rate regime (with a small proportion of excess deposits being punished with a ‘negative rate’). That decision sent banking stocks into a tailspin and helped push the yen to its highest level since November 2014.
Although this reaction can be said to have been fuelled by a more generic risk-off move in markets driven by concerns that the Fed has made a policy mistake, we actually think that this only strengthens our point.

It merely highlighted the very real existence of the Currency War, stimulating the negative response in global financial markets. The key problem here is that these major central banks are no price takers, they are price setters and therefore influence the circumstances under which other central banks are operating. Moreover, this has been aggravated by the fact that by running significant quantitative easing programs, both the BoJ and ECB have made their currencies attractive as funding currencies in carry trade positions."
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